The UAE has stepped in to provide financial support to Bahrain as blowback from the war in the Middle East raises pressure on the island nation's economy.
The two countries on Wednesday signed a currency swap agreement that will see the Emirati central bank provide up to 20 billion Emirati dirhams ($5.4 billion) to Bahrain over the next five years in exchange for Bahraini dinars.
The arrangement will provide vital foreign currency liquidity to Bahrain, which has been hit hard by the six-week regional war.
Bahrain is among the most vulnerable of the Arab Gulf states to the instability triggered by the US-Israel war on Iran.
The tiny kingdom is among the most indebted countries in the world, and prior to the war was on course to run a budget deficit of more than 10 percent.
Disruption in the Strait of Hormuz has prevented it from exporting oil and aluminium, which account for more than two-thirds of the government's revenues and around a quarter of GDP.
Iranian missiles and drones have damaged critical infrastructure, including Aluminium Bahrain's smelter – one of the largest in the world – and the country's biggest oil refinery.
The heads of the countries' central banks said on Wednesday that the agreement would support financial stability and strengthen trade and investment ties.
Currency swap agreements are usually undertaken between countries to provide emergency liquidity to central and commercial banks during crises.
Fitch Ratings said the swap line was likely a precautionary move to shore up the government's finances rather than a crisis response.
"There is little doubt that Bahrain’s GCC partners view preventing social turmoil in Bahrain as a priority during the conflict, including as a result of tensions around budget funding," Fitch Ratings' Cedric Berry told The New Arab.
"We estimate that they would step in with grants and cheap loans in addition to the recent swap line to ensure Bahrain can cover its debt service commitments and other funding needs if needed through the conflict. Thanks to this support, liquidity tensions are unlikely to arise," Berry added.